11 Actions to Consider from the SEC’s Mandate on Human Capital Disclosure (i4cp login required)

Productivity

Over the past two weeks since i4cp published its initial
guidance on the U.S. Securities and Exchange Commission’s (SEC) recent ruling
on human capital disclosure
 (member only),
we’ve engaged in many conversations with a cross section of senior-level
business executives – including several who serve on public company boards –  to gain insight into the corporate response.

It is clear from those
conversations that – while some have increased disclosure of human capital
metrics (e.g., Walmart, Microsoft, Deutsche Bank, Allianz, to name a few) – awareness
and strategies are in early stages at most companies. However, we anticipate
this will be a topic of discussion at many corporate board meetings in
preparation for upcoming earnings releases.

As part of i4cp’s continued coverage, we are reiterating our
initial guidance and recommendations, while also putting forth additional information
to consider.

Our initial guidance published on September 28, 2020:

  1. Create and maintain an inventory of your organization’s
    total talent (including and beyond full-time and part-time employees). While U.S.-based
    public companies remain mandated by the SEC to disclose the total number of
    people they employ, the SEC now encourages these companies to disclose
    the number of contractors and contingent workers, too.
  2. Be prepared to be called on for insights and data on any
    element of the workforce associated with business risk and/or readiness,
    specifically those related to culture, capability, and ESG (environmental,
    social, and corporate governance).
    1. Be Aware: In this era of stakeholder capitalism, ESG has vaulted to
      the forefront. ESG often incapsulates elements typically associated with human
      capital. An example is the September 2020 World Economic Forum white paper, Measuring
      Stakeholder Capitalism Towards Common Metrics and Consistent Reporting and
      Sustainable Value Creation.
      In that white paper about global ESG metrics,
      elements specific to diversity and inclusion, well-being, and skills for the
      future are prominent.
  3. Prepare now for future public disclosure specific to workforce metrics.
    A good start is to become familiar with the proposed International Organization
    for Standardization’s (ISO) 30414 Human Capital reporting standards.
  4. Understand your organization’s unique and critical
    intangible business value drivers (e.g., innovation, diversity, culture) and
    their associated indicators and measures, as well as actions being taken to
    improve them.
  5. Additional
    considerations as of October 23, 2020:

  6. As we stated in our initial guidance, the
    amendments will be effective 30 days after publication
    in the Federal
    Register. The publication date was October 8, 2020 and the effective date
    is now November 9, 2020.
  7. Any listing company on U.S.
    exchanges is subject to this new SEC disclosure.
  8. While human capital
    metrics disclosure is dependent on what is material to the
    business, there is no clear consensus on what companies will or should
    disclose. What is considered material will likely depend on the industry
    and the markets within which an organization operates. One indicator may
    be reviewing the people data that is currently elevated to the board as a
    baseline of what could be deemed material. This is a good time to consider
    benchmarking the people data that is elevated against that of other
    organizations (e.g., culture measures, diversity/inclusion measures, ESG,
    etc.).
  9. Examine current references
    or statements about the workforce in your recent proxy statements, 10Ks,
    10Qs, earnings calls, and investor presentations. Be aware of language
    used that may be deemed material.
  10. It is important that HR
    develops a narrative for the board of directors on which human capital
    components matter most, what the company is doing to optimize those
    components, and how it is progressing against those objectives. However,
    to mitigate risk, we expect companies initially will publicly disclose
    data without detailed narrative. We anticipate this will evolve over time
    as organizations are likely to follow each other’s leads in the amount of
    detail disclosed and descriptive narrative. This would be similar to what
    we have seen over the last few years with more detailed diversity disclosures.
  11. It is unclear where
    ownership of human capital disclosure will reside within an organization.
    What is clear is that it’s a multi-disciplinary responsibility, and the HR
    function will be more involved in the reporting process.
  12. Importance of the
    Workforce Analytics function is increasing and that will require more
    collaboration with Finance, Investor Relations, and the General Counsel.

For the HR function specifically

Now is the time to
better understand the leading indicators of the people and culture components
of the business that have the greatest impact on business outcomes. If you
say, “We have the best talent,” how are you measuring that? If you say,
“Our workforce is highly engaged,” what percent of the workforce is highly
engaged? What is the breakdown between executives, managers, and employees who are
highly engaged? And what factors drive high engagement of the
workforce? If attracting, developing, and retaining talent is key to
success, what do you spend on training? What is the turnover rate by
segment, geography, and employee level?

These are a small sample of questions to consider now that
investors will be expecting more detailed disclosures on the workforce.

We will continue to engage in and monitor discussions
related to the new SEC ruling, and human capital metrics in general, and will
publish updated guidance and considerations as appropriate. In the meantime,
i4cp member organizations can access the following related resources:

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